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Working capital financing covers gaps when your business is low on cash. It pays for payroll, inventory, rent, and other operating costs.
I've been arranging financing for small-to-midsize business (SMB) owners for 15 years, and working capital loans make sense when you're waiting on revenue you already earned.
Below, I cover the main types of working capital financing, how it works, what it costs, and what lenders compare.
| Financing option | How it works | Typical cost | How fast | Typical use |
|---|---|---|---|---|
| Business line of credit | Draw what you need, repay it, draw again | APRs starting at 6% | As fast as same day | Recurring or unpredictable gaps |
| Short-term loan | One lump sum repaid on a fixed schedule | APRs starting at 6% | As fast as same day | A defined one-time need |
| Invoice factoring | You sell unpaid invoices to a factoring company, which then collects from your customer | 0.5% to 5% per invoice per month | 1 to 2 weeks | Slow-paying business customers |
| Supplier (trade) credit | Your vendor lets you pay 15 to 90 days after delivery | No interest if you pay on time | Set by your vendor | Stretching payables |
| Merchant cash advance | Cash advanced against future sales, repaid as a share of what you bring in | Factor rates from 1.08 to 1.45 | As fast as same day | A fallback when the other routes don't work |
What Is Working Capital Financing and How Does It Work?
You use working capital financing when you need to fill a short-term operational need like rent, inventory, or payroll. Expect to pay your working capital loan back over a short cycle of a few months to a few years.
Working capital loans can't be used for real estate or heavy equipment. If you're looking to fund a bigger purchase, longer-term financing options, like an SBA loan, may be a better fit.
Here are the types of working capital financing I see SMBs reach for when they need to fill a cash flow gap.
Business line of credit
A revolving credit line you draw and repay. Interest is only charged on what you use.
Short-term loan
A lump sum of money that you pay back to the lender in fixed installments.
Invoice factoring
A factoring company advances part of an unpaid invoice and collects from your customer.
Merchant cash advance
You receive a lump sum of cash in exchange for a percentage of future sales.
Supplier credit
The vendor provides the service now and bills you later. No borrowing is involved, so it gives your accounts payable a break.
SBA 7(a) Working Capital Pilot Program
The U.S. Small Business Administration (SBA) offers monitored working capital lines through the 7(a) program. It covers loans up to $5 million.
The best way to make a decision is to match the financing option to your specific needs and timeline. If you need money for recurring expenses, a business line of credit might be a match because you can draw on the line multiple times. If you need cash fast, a merchant cash advance can turn a percentage of your future sales into quick money, but it's expensive.
Using a HELOC for Working Capital
One other type of financing that I'll mention is a home equity line of credit (HELOC). A HELOC is a revolving credit line that lets you borrow money against the value of your home.
HELOC rates are often lower than traditional business financing. The trade-off is that your home secures the loan, so a stretch of bad months can put your house at risk.
Minimum Qualifications
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
What Lenders Look At
Underwriting depends on the lender and financing type, but most look at the same things. Here's what matters in the application process.
Time in business
Most lenders want at least six months of operating history. Banks and credit unions typically want at least two years.
Revenue
Lenders consider both your annual revenue and your monthly revenue. This helps decide the size of your loan.
Personal credit score
A higher credit score typically unlocks better interest rates and repayment terms.
Cash flow
Your bank statements show whether the financing fits a deposit pattern that aligns with your business.
Existing debt
Lenders look at other balances and remittances to determine how much additional debt you can take on.
Collateral or a personal guarantee
Revenue-based financing typically doesn't require collateral, but you may be asked to sign a personal guarantee
What Working Capital Financing Costs
The total cost of your working capital financing depends on what you're considering. Let's break it down with a few examples.
Business lines of credit and short-term loans quote an APR. This bundles interest and most fees into an annual number. Let's say you get approved for a $50,000 loan at 6%. Repaid over 24 months, that costs roughly $3,185 in total interest.
Merchant cash advances use a factor rate. The factor rate is a fixed multiplier applied to the advance amount to determine the total repayment. Merchant cash advances through Clarify Capital's network of lenders range from 1.08 to 1.45. A 1.35 factor on $50,000 means you'll repay $67,500 in total.
Invoice factoring quotes a fee per invoice instead. With Clarify Capital's network of lenders, that runs 0.5% to 5% per invoice per month. On a $50,000 invoice that a customer pays in 30 days, a 3% fee costs $1,500.
On top of the headline rate, you'll also want to watch out for origination fees, draw fees, and servicing charges. These fees can increase the total cost of your financing.
How To Pick the Right Financing Option
Match the structure of the financing to your cash flow gap. Here are a few questions I ask my customers when they're not sure what to pick.
Does the cash flow gap keep coming back? Seasonal swings may call for a business line of credit or a HELOC. Both of these options let you draw only when you need to.
Is the problem slow-paying customers? If your issue is a customer who takes forever to pay, consider invoice factoring.
Is the cash flow gap one specific number? One bulk purchase or a single payroll shortfall may fit short-term loans. These are paid in a lump sum and repaid in fixed payments.
Do you need to stretch payables? I typically recommend asking your vendors for longer terms. It's cheaper than borrowing, and the worst they can say is no.
Have other options fallen through? Maybe your credit isn't in the best shape, or you need money immediately. Merchant cash advances can fit in this situation, but the trade-off is that they're expensive.
Fill Cash Flow Gaps
A cash flow gap doesn't mean your business is struggling. I've seen plenty of successful SMBs experience ups and downs in cash flow. Working capital financing helps to fill these gaps when you're strapped.
Apply today with Clarify Capital to see what you qualify for. Checking your options won't impact your credit score.
FAQ on Working Capital Financing
Still have questions on working capital financing? Here are straight answers to the most common ones.
What is Working Capital Financing?
Working capital financing is borrowing that covers day-to-day operating costs like inventory, rent, and payroll. It's different from long-term financing, which is often used for real estate or major equipment purchases.
What Does Working Capital Mean in Finance?
In finance, working capital is your current assets minus your current liabilities. Current assets are anything that can turn into cash within a year, like inventory and unpaid invoices. Current liabilities are what you owe in the same time period.
What Credit Score Is Needed for a Working Capital Loan?
It depends on the type of financing you're applying for. Short-term business loans through Clarify Capital require a minimum credit score of 550. A business line of credit requires a minimum credit score of 600. Online lenders typically have more flexible credit requirements, while banks and credit unions look for higher scores. Regardless of where you're applying, higher scores tend to unlock better terms and rates.
Which Working Capital Option Is Fastest?
Lines of credit, short-term loans, and merchant cash advances from online lenders are the fastest. You can sometimes receive financing as fast as same day.
Is My Information Safe When I Apply?
Yes. Clarify follows SOC 2 security principles, and your application information stays protected throughout the process.
Michael Baynes
Co-founder, Clarify
Michael has over 15 years of experience in the business finance industry working directly with entrepreneurs. He co-founded Clarify Capital with the mission to cut through the noise in the finance industry by providing fast funding and clear answers. He holds dual degrees in Accounting and Finance from the Kelley School of Business at Indiana University. More about the Clarify team →
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